With the rise of cryptocurrencies around the globe, there have been quite a few cases of hacker attacks on crypto exchanges, causing significant losses in the industry. According to a Reuters report, over US$927 million worth of cryptocurrencies were lost due to exchange hacks in the first nine months of 2018, 250 percent higher than that in all of 2017.
With crypto exchanges being targeted by cyber criminals, there is a growing need for investors to safeguard their crypto holdings in crypto hardware wallets, devices that can store cryptocurrencies beyond the reach of online hackers.
Benjamin Soong, head of Asia Pacific region for Ledger, the Paris-headquartered cryptocurrency security company known for its hardware wallet products, recently spoke to EJ Insight on the various issues surrounding the industry, including the security aspect.
The executive says his firm’s crypto wallet sales remain fine despite a major selloff of popular cryptocurrencies such as Bitcoin and Ethereum since the beginning of 2018.
Here in the second part of the interview, Soong shares his views on how hardware wallets can prevent crypto exchange hacks. Excerpts:
EJ Insight: As we understand, cryptocurrency wallets can be categorized into two types: a “hot” wallet which is connected to the internet and capable of making immediate transactions, and a “cold” wallet which is secured offline. But what we have seen in the market is that hot wallets are in general more popular among crypto investors compared with cold wallets. Why is that so?
Soong: There are a lot of individuals using hardware wallets, but at the same time, you have a group of retail investors that maybe don’t have a big balance, so they just keep [their crypto assets] inside the crypto exchange. So far we have seen exchanges compensate investors when a hack or loss occurs. I’m not sure this form of coverage is sustainable long term, especially as this asset class grows bigger and becomes a bigger target for theft.
The economics in the industry have changed over the past 12-18 months. Previously exchanges were generating large amounts of revenue from both listing and trading fees. I’ve seen listing fees come down from a few million dollars to pretty much 3 Bitcoins (At the time of writing on March 15, Bitcoin was trading at US$3,920 per token), or in some cases even free. Trading volumes are also down significantly, given the current bear environment, so improving on security is a must.
Q: How would the crypto hardware wallet safeguard the crypto asset holdings of the exchanges in case of a hack?
A: We have a lot of exchanges using our technology, to secure their crypto holdings offline. In fact, we have spoken to the majority of exchanges in Asia, all exchanges have hot and cold wallets. Seventy percent of the exchanges in Asia are using some combination of Ledger’s hardware wallet as their cold storage solution.
There was a news article that came out relating to a CEO of a crypto exchange in Canada. He passed away, and there were no private keys, and all of the funds were locked up. This reflects the importance and complexity of blockchain technology, and hence the need for a governance mechanism, disaster recovery, among others, in order for institutions to be able to manage this asset class properly.
I think over the next 12 months, you’re going to see a lot of exchanges migrate from Ledger’s retail technologies, and replace it with our institutional enterprise solution. It is because Ledger’s retail products, like Ledger Nano S, are still the retail products. From a technology perspective, it’s completely safe, but from governance and segregation of duties perspective, you have a challenge there because you should not let one person hold the hardware wallet with the private keys.
So our institutional offering, Ledger Vault, designed for banking institutions, funds and family offices, is different. Notable features include multi-authorization, physical segregation and asset recovery, even though it’s one individual is compromised. That’s what we realize that an institutional offering was required in this marketplace.
Q: In recent years, the market has seen the boom in startups and tech firms entering the crypto wallet field, including tech giant and major smartphone maker Samsung, which includes a cryptocurrency wallet in its latest flagship phones. How does Ledger stand out from the competitors in the field?
A: First of all, our technology is very different. We use hardware, while a lot of people use software technology. There are two key things for the Ledger technology; one is that we use ‘Secure Element’.
For the ‘Secure Element’, you can think of it as the chip used in the credit card. With the Secure Element in credit cards, no one has been able to extract secrets or information off the cards, people can commit credit card fraud, but extracting information about Secure Element has not happened before. There’s decades of certification around that.
Another thing that Ledger has that I think will be near impossible for anybody to replicate in the next four to five years, is we’ve developed our own proprietary blockchain operating system called “BOLOS”, our Blockchain Open Ledger Operating System, which the company started developing back in 2004.
For anybody else who wants to try to replicate building an operating system that we have installed on the Secure Elements, that’s going to be extremely challenging. What you see in the competitive environment, is a lot of people are using, what I’d say, more visual gimmick, fun factor, to try to differentiate, so people will say ‘oh, I’m using biometrics solutions like thumbprint [recognition],” there’s a lot of people that do stuff like that.
The proof is in the pudding at the end of the day, and hence why many exchanges still use the Ledger Nano S as part of their cold storage solution despite all the other options in the marketplace. We see a lot of actually competitors that try to copy and replicate what we do, but quite frankly it’s going to be nearly impossible for them to do that.
Q: As a leading player in the crypto space, taking about the market in general, how long do you think will the “crypto winter” last?
A: To be honest, I think we are going to have a long winter, I would say you shouldn’t be surprised that the winter lasts for 18 to 24 months. If you benchmark [the cryptocurrency prices] to late 2017-2018, that was a bubble, so even in 18-24 months from now, I don’t think [the prices are] going to get back there.
But I think the key thing is really about the [market] infrastructure, because the retail market is not going to be the one that’s going to drive this asset class back up, it will have to be [from] the institutional side.
In order for the institutional side to grow, I think the market will need to see that custody services are available for this asset class. Security services are also critical for this asset class. Moreover, governance, regulation, and insurance; until all these “dominos” fall into place, the infrastructure is not established in the market, and big funds are not going to move capital into this asset class.
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This is the second of a two-part interview with Benjamin Soong, head of Asia Pacific, Ledger.
Also see: Crypto security firm Ledger sees big Asia opportunities